Fidelity  and  Surety  Insurance. 


A  PAPER 

BY 

•;v  • 

CHAS.  A.  DEAN, 

PRESIDENT  OF  THE 

National  Surety  Company, 

OF  NEW  YORK. 


READ  BEFORE  THE  THIRTIETH  NATIONAL 
CONVENTION  OF  INSURANCE  COMMISSIONERS. 


DETROIT,  SEPTEMBER  7—9,  1899. 


Digitized  by  the  Internet  Archive 
in  2017  with  funding  from 

University  of  Illinois  Urbana-Champaign  Alternates 


https://archive.org/details/fidelitysuretyinOOdean 


Fidelity  and  Surety  Insurance. 


HE  custom  of  giving  bonds  is  as  old 


J.  as  civilization,  and  it  is  surprising 
that  corporate  suretyship  was  not  much 
earlier  introduced.  New  forms  of  insur¬ 
ance  are  the  outgrowth  of  new  conditions, 
and  any  fresh  departure  which  embodies 
an  element  of  risk,  usually  finds  enterprising 
capital  prompt  to  promote  an  insurance 
feature,  if  that  risk  can  be  intelligently  un¬ 
derwritten.  Yet  for  ages  after  corporations 
first  engaged  in  other  lines  of  insurance,  we 
find  individuals  obligating  themselves  to 
vouch  for  their  friends’  honesty  and  business 
success,  and  suffering  consequent  loss.  It 
is  only  fifteen  years  since  the  first  company 
was  organized  in  this  country  for  the  prose¬ 
cution  of  a  general  fidelity  and  surety  busi¬ 
ness.  One  would  think,  too,  that  upon  its 
appearance,  the  corporate  bond  would  have 
been  greeted  with  universal  approbation  ; 
that  the  demand  for  it  would  have  been  im- 


3 


3  S  3 


mediate ;  the  growth  of  the  business  phe¬ 
nomenal.  But  such  was  not  the  case.  De¬ 
spite  the  warnings  of  Holy  Writ,  the  coun¬ 
sel  of  philosophers  and  eminent  writers, 
the  dictates  of  logical  reasoning  and  com¬ 
mon  sense,  the  public  has  been  slow  to 
comprehend  its  advantages,  and  to-day, 
while  considerable  progress  has  been  made, 
a  very  large  percentage  of  the  whole  number 
of  bonds  given  in  the  United  States  is  signed 
by  individuals.  •  Yet  there  is  no  argument 
to  support  the  personal  bond.  The  only 
excuse  for  its  ever  having  existed,  was  the 
absence  of  its  corporate  successor.  No  man 
has  a  right  to  ask  his  friend  for  such  gratui¬ 
tous  assistance.  No  man  is  justified  in 
assuming  for  another,  an  obligation  which 
hazards  his  estate  and  may  impoverish  his 
family. 

Sir  Walter  Raleigh  so  well  expressed  the 
position  of  the  personal  surety,  and  also 
the  imposition  upon  friendship  which  the 
personal  bond  entails,  that  companies  have 
made  free  use  of  his  words  in  their  educa¬ 
tional  literature,  and  it  is  fitting  that  I 
here  repeat  the  familiar  quotation  : 

“  If  any  desire  thee  to  be  his  Surety,  give  him  a  part 
of  what  thou  hast  to  spare  ;  if  he  press  thee  farther,  he 
is  not  thy  friend  at  all,  for  friendship  rather  chooseth 


4 


harm  to  itself,  than  offereth  it.  If  thou  be  bound  for  a 
stranger,  thou  art  a  fool ;  if  for  a  merchant,  thou  puttest 
thy  estate  to  learn  to  swim  ;  if  for  a  churchman,  he  hath 
no  inheritance ;  if  for  a  lawyer,  he  will  find  an  evasion 
by  a  syllable  or  word  to  abuse  thee ;  if  for  a  poor  man, 
thou  must  pay  it  thyself;  if  for  a  rich  man,  he  needs 
not ;  therefore,  from  Suretyship,  as  from  a  manslayer  or 
enchanter,  bless  thyself;  for  the  best  profit  and  return 
will  be  this— that  if  thou  force  him  for  whom  thou  art 
bound,  to  pay  it  himself,  he  will  become  thy  enemy  ;  if 
thou  use  to  pay  it  thyself,  thou  wilt  become  a  beggar.” 

Moreover,  the  personal  bond  is,  for 
many  reasons,  inadequate  security.  In 
event  of  loss,  the  surety  will  frequently  be 
found  to  have  become  insolvent,  or  if  finan¬ 
cially  able  to  pay,  will  seek,  as  a  rule,  every 
avenue  of  escape.  He  is  a  favorite  of  the 
law,  and  he  has  the  sympathy  of  courts 
and  juries. 

I  shall  not  go  into  the  earlier  history  of 
the  corporate  bond  across  the  Atlantic, 
where  it  was  first  introduced,  nor  enlarge 
upon  its  advantages  over  the  personal  bond, 
but  rather  confine  my  remarks  to  the  busi¬ 
ness  as  conducted  in  the  United  States, 
outlining,  in  a  general  way,  the  principles 
applicable  to  fidelity  and  surety  under¬ 
writing,  and  touching  upon  prevailing  con¬ 
ditions  and  future  prospects. 

The  business  of  corporate  suretyship  is 
divided  into  two  distinct  branches.  One  is 
commonly  known  as  “  Fidelity  Insurance, ” 


5 


i.e.,  guaranteeing  the  honesty  of  officers  and 
employes  of  corporations,  etc.  Under  the 
language  of  the  insurance  law,  fidelity  in¬ 
surance  may  include  bonds  of  fiduciaries 
and  other  special  risks,  but  I  shall  treat  of 
it  as  applied  only  to  bonds  of  officers  and 
employes,  classhying  all  other  risks  under 
the  second  branch,  sometimes  styled  “ Surety 
Insurance,”  i.e.,  becoming  surety  upon  bonds 
and  obligations  permitted  or  required  by 
law,  guaranteeing  the  performance  of  con¬ 
tracts,  etc. 

Fidelity  Insurance. 

Fidelity  Insurance,  as  limited  above, 
was  first  introduced  in  the  United  States 
by  the  Fidelity  and  Casualty  Company, 
organized  in  1876.  Under  its  broad  chart¬ 
er,  fidelity  insurance  is  only  a  feature,  and 
its  first  business  of  this  character  was  trans¬ 
acted  in  1879.  The  Guarantee  Company 
of  North  America,  of  Montreal,  was  the 
pioneer  fidelity  compan}^  in  North  America, 
and  prior  to  its  admission  to  the  United 
States  in  1881,  had  made  some  little  pro¬ 
gress  in  the  Dominion.  These  two  com¬ 
panies  had  a  monopoly  of  the  field  until  the 


6 


organization  of  the  American  Surety  Com¬ 
pany  in  1884.  During  the  previous  year, 
their  aggregate  fidelity  premium  income  was 
only  $238,611.  Slow  indeed  had  been  the 
progress  up  to  that  time! 

Selection  of  Risks. — We  have  not  reliable 
experience  tables  to  govern  the  acceptance 
of  risks,  and  I  doubt  if  statistical  informa¬ 
tion  will  ever  furnish  an  absolute  guide. 
Some  men  will  be  honest  under  any  and  all 
circumstances ;  others  will  misappropriate 
without  excuse  ;  but  the  great  majority  of 
men  intend  well  and  fall  only  through 
temptation  and  weakness.  Our  decision 
must  be  founded  upon  the  applicant’s  family 
connections,  his  own  personal  record,  the 
characterizing  influences  of  the  position  it¬ 
self,  the  attendant  opportunity  for  misap¬ 
propriation  of  funds  and  the  system  of 
supervision  and  checking  of  accounts  which 
will  be  maintained  by  his  employer.  It 
would  be  difficult  to  list  the  causes  of  de¬ 
falcation  in  order  of  importance.  Certain 
vices  may  be  classed  as  equally  dangerous, 
and  I  would  hesitate  to  say  that  specula¬ 
tion  does  not  lead  to  more  disastrous  re¬ 
sults  than  any  of  the  so-called  vices.  Pre- 


7 


vailing  conditions  have  much  to  do  with 
the  question.  I  once  thought  that  loca¬ 
tion  was  a  very  important  factor  in  fidelity 
underwriting,  but  after  A-ears  of  experience 
I  am  prepared  to  say  that  men  reared  in  a 
new  country,  where  the  absence  of  refined 
social  conditions  and  the  prevailing  atmos¬ 
phere,  invite  an  unusual  freedom  of  life,  are, 
perhaps  by  reason  of  this  very  environment, 
as  good  fidelity  risks  as  though  brought  up 
in  touch  with  more  elevating  surroundings. 
If  the  applicant’s  family  are  worthy  per¬ 
sons,  and  the  applicant  himself  has  arrived 
at  mature  age  and  in  his  own  record  shown 
evidence  of  a  high  standard  of  character, 
we  have  a  fair  starting  point.  But  we  also 
have  to  deal  with  the  young  man  just  be¬ 
ginning  life,  with  no  business  record  to 
guide  us.  What  shall  be  his  future  will 
largely  depend  upon  the  temptations  which 
may  or  may  not  confront  him.  And  here 
let  me  say  that  I  think  it  morally  wrong  to 
advance  mere  boys  to  important  positions 
of  trust.  It  frequently  occurs  that  an  em¬ 
ployer,  recognizing  ability  in  a  young  man, 
places  him  in  a  position  of  responsibility 
far  beyond  his  years.  If  he  have  not  ex¬ 
ceptional  control  of  himself,  he  will  be 


8 


spoiled  at  the  outset.  First,  he  will  form 
an  exalted  opinion  of  his  own  importance — 
a  most  dangerous  step.  Next,  he  will  be 
found  living  beyond  his  means,  from  which 
it  is  only  another  step  to  his  downfall. 
The  employer  will  do  the  promising  young 
clerk  a  kindness  if  he  advance  him  through 
positions  of  trust  gradually,  affording  an 
opportunity  for  his  character  to  develop, 
and  prepare  him  for  the  ultimate  position 
of  greater  responsibility. 

Inspection* — Is  fidelity  under  writing,  then, 
a  mere  speculation  upon  the  outcome,  wfith 
reliance  upon  the  average  on  the  side  of  hon¬ 
esty  ?  Certainly  not.  Properly  conducted, 
the  work  upon  fidelity  risks  only  begins  with 
their  acceptance.  There  follows  an  investi¬ 
gation  more  or  less  minute,  as  circumstances 
in  individual  cases  may  dictate,  into  the 
continued  personal  life  of  the  employe. 
Occasionally  sentiment  has  prompted  ex¬ 
pressions  in  opposition  to  the  system  of 
inspection  pursued,  accusing  companies  of 
occupying  the  sphere  of  detective  agencies, 
but  their  authors  do  not  fully  comprehend 
the  situation ;  are  usually  unfamiliar  with 
the  subject;  therefore  incapable  of  intelli- 


9 


gently  criticising  the  methods  emplo3"ed, 
and  are  ignorant  of  the  mutual  advantages 
to  all  concerned,  of  a  searching  and  con¬ 
tinued  investigation.  It  can  be  so  conducted 
as  not  to  be  in  any  way  offensive,  and  as  for 
the  employe,  he  many  times  comes  to  ap¬ 
preciate  that  the  fidelity  company  is  his 
best  friend,  as  when  it  speaks  a  word  of 
timely  caution  at  the  very  threshold  of  an 
impending  downward  career,  and  turns  him 
“  right  about  face.”  Subsequently  he  may 
thank  the  company  and  its  methods  for  his 
ultimate  success  in  life. 

As  I  have  above  stated,  some  men  are 
honest  from  principle,  strong  in  character, 
and  regardless  of  conditions  and  surround¬ 
ings  will  not  be  swerved  from  the  path  of 
strict  fidelity.  Others,  possessing  the  same 
elevating  principles,  are  weak,  subject  to  the 
influences  of  their  environments  and  easily 
led  astray ;  and  there  are  some  wholly 
devoid  of  principle,  and  restrained  from 
wrong-doing  only,  if  at  all,  through  fear  of 
the  penalties  of  the  law.  The  latter  must 
be  weeded  out  and  close  inspection  will 
soon  furnish  ample  excuse  for  cancellation. 
Our  chief  labors  lie  with  that  great  middle 
class.  Perhaps  they  constitute  a  majority 


10 


of  the  whole.  Who  shall  say  what  temp¬ 
tations  come  into  our  individual  lives  ? 
The  constant  vigilance  of  companies  which 
strive  to  prevent  losses,  and  labor  to 
remove  the  causes  which  lead  to  them,  is 
of  as  great  a  benefit  to  the  employer  as  is 
the  limited  guarantee  against  loss  ;  and  I 
assert  that  inspection,  open  and  secret,  is 
the  most  important  factor  to  the  safe  and 
proper  conduct  of  fidelity  insurance ;  and 
the  company  which  has  the  most  efficient 
corps  of  trained  inspectors,  not  only  will 
show  the  lowest  loss  ratio,  but  also  will 
be  of  the  greatest  benefit  to  employer  and 
employe. 

Systems  of  Accounting. — There  are  very 
few  men  who  deliberately  and  premedi- 
tatedly  set  about  working  out  a  plan  to 
embezzle  and  cover  up  their  shortages.  Op¬ 
portunity  plays  as  important  a  part  as 
disposition.  Defalcation  usually  springs 
from  yielding  to  impulse,  the  result  of  some 
quite  unforeseen  condition  or  circumstance. 
The  weak  man  may  be  confronted  by  a 
great  temptation  to  use  his  employer’s 
funds  for  a  purpose — no  matter  what. 
Whether  this  man  will  yield  or  not,  de- 


11 


pends  largely  upon  his  opportunity  to  evade 
early  discovery.  If  a  bank  account  be  at 
his  disposal,  subject  to  his  individual  check, 
the  chances  are  he  will  fall,  hoping  to  find 
some  means  of  replacing  the  amount  taken, 
before  his  act  shall  have  been  discovered. 
So  there  enters  into  the  proper  conduct  of 
fidelity  insurance,  the  education  of  employ¬ 
ers  to  the  adoption  of  approved  systems  of 
accounting  and  audit,  in  place  of  lax 
methods  frequently  found  to  prevail.  Much 
has  been  accomplished  in  this  direction  since 
the  introduction  of  fidelity  insurance,  but 
much  more  remains  to  be  done.  We  still 
find  many  instances  where  the  large  re¬ 
sources  of  corporations  and  business  enter¬ 
prises  are  in  the  custody  and  under  the 
control  of  one  man,  and  an  unwillingness 
manifested  to  remedy  the  evil.  Of  course 
there  are  exceptional  cases,  where  the  trust¬ 
ed  official  must  act  alone  in  the  absence  of 
any  associate  with  whom  to  divide  respon¬ 
sibility,  but  where  the  circumstances  permit 
of  provision  for  such  joint  control  of  funds 
and  securities  as  will  reduce  the  possibility 
of  loss  to  a  minimum,  fidelity  companies 
will  do  well  to  decline  to  undertake  the 
risk,  unless  such  approved  systems  have 
been,  or  will  be,  adopted. 


12 


Prosecution  of  Defaulters* — One  of  the  argu¬ 
ments  in  favor  of  fidelity  insurance,  as 
widely  proclaimed,  is  the  prosecution  of  the 
defaulter.  The  very  existence  of  the  corpo¬ 
rate  bond  has  a  deterrent  effect  upon  the 
employe  hesitating  under  dangerous  influ¬ 
ences.  He  cannot  anticipate  the  leniency 
and  assistance  he  might  expect  from  his 
friends,  had  they  become  his  surety  in  the 
old  way.  He  knows  that  if  he  be  unfaith¬ 
ful,  he  will  have  a  corporation  with  which 
to  deal,  and  not  a  personal  friend  ;  that  if 
he  become  a  fugitive,  the  company  will  pur¬ 
sue  him,  no  matter  to  what  remote  clime 
he  may  flee,  and  exhaust  every  means  to 
cause  his  apprehension  and  return.  Prose¬ 
cution  and  conviction  certainly  have  a 
salutary  effect  upon  fellow  employes,  and 
timely  warning  is  thereby  given  many  on 
the  verge  of  yielding  to  temptation.  Com¬ 
panies  consider  the  money  well  invested , 
rather  than  expended ,  for  the  apprehension 
of  the  fugitive.  Losses  sustained  by  large 
corporations  throughout  the  country  on 
account  of  embezzlement,  have  decreased 
probably  75  per  cent,  since  the  adoption  of 
the  corporate  bond.  This  for  two  reasons  : 
First,  because  of  improved  methods  of 


13 


checking  and  accounting  adopted  by  em¬ 
ployers,  in  many  instances  at  the  suggestion 
of  the  surety  company  ;  and  second,  because 
of  prosecutions  instituted  by  the  companies. 
A  prosecution  should  never  be  brought  as 
a  matter  of  revenge,  or  with  a  view  to 
forcing  reimbursement  for  the  loss  sustained  ; 
and,  in  some  instances,  where  there  are 
extenuating  circumstances,  it  should  be 
waived  ;  but  in  all  cases  where  the  proof  is 
clear,  the  law  should  be  permitted  to  take 
its  course,  and  the  ends  of  justice  are  best 
subserved  hy  prosecution. 

Confidential  Communications* — One  other 
matter  I  deem  of  sufficient  importance  to 
require  brief  mention.  I  refer  to  confidential 
communications  in  the  investigation  of  risks. 
A  few  years  ago  the  legislature  of  Texas 
enacted  a  law  which,  in  substance,  required 
that  whenever  a  company  should  cancel  a 
fidelity  bond,  or  having  once  become  surety 
for  a  person,  should  upon  application,  re¬ 
fuse  to  do  so  again,  the  company  must 
furnish  to  such  person,  upon  demand,  “a 
full  statement,  in  writing,  of  the  facts  on 
which  the  action  of  the  corporation  is  based, 
and  if  such  action  be  based  in  whole  or  in 


14 


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'Number 


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part  on  information,  all  such  information,, 
together  with  the  name  or  names  of  the 
informants,  with  their  places  of  residence,” 
and  prescribing  a  heavy  penalty  for  refusal. 
In  1897  the  law  was  amended  so  as  to 
excuse  the  company  from  furnishing  the 
names  and  addresses  of  informants.  In  the 
opinion  of  eminent  counsel,  such  statutes 
are  unconstitutional.  However  this  may 
be,  they  are  certainly  ill-advised  and  have 
proven  other  than  valuable  to  the  parties 
whom  they  were  intended  to  benefit.  A 
fidelity  business  cannot  be  safely  conducted 
without  the  most  searching  investigation 
and  in  order  to  obtain  responses  to  our  in¬ 
quiries,  we  must  assure  references  that  the 
information  given,  will  be  strictly  confiden¬ 
tial,  and  all  such  communications  ought, 
under  the  law,  to  be  privileged.  Suppose 
an  applicant  for  a  bond  have  an  unsavory 
reputation.  His  neighbor  will  not  disclose 
the  facts  if  a  copy  of  the  communication  is 
to  be  placed  in  the  applicant’s  hands.  Tell¬ 
ing  the  truth  in  such  cases  would  often  lead 
to  breaches  of  the  peace,  and  might  lead  to 
murder.  On  the  other  hand,  suppose  that 
some  reference  maliciously  give  false  testi¬ 
mony  regarding  an  applicant.  This,  in  and 


15 


of  itself,  would  not  lead  the  company  to  de¬ 
cline  the  bond,  because,  in  every  case,  charges 
made  are  fully  and  carefully  investigated, 
so  that  when  the  company  finally  acts  upon 
an  application,  it  substantially  knows  what 
the  truth  is.  Texas,  and  the  one  or  two 
other  States  only,  which  have  adopted  such 
laws,  should  lose  no  time  in  repealing  them. 
Idaho  once  had  a  statute  of  this  kind,  but 
her  last  legislature — be  it  said  to  its  credit 
— wiped  it  from  the  statute  books.  Such 
laws  have  been  introduced  into  the  legis¬ 
latures  of  some  of  the  other  States,  but 
have  been  defeated. 

Surety  Insurance. 

The  second  branch ’of  the  business,  des¬ 
ignated  “  Surety  Insurance  ”  was  undertaken 
first  by  the  American  Surety  Company, 
which,  for  half  a  decade,  practical^  had  the 
field  to  itself.  The  harvest  which  it  reaped 
during  that  period  was  its  just  reward  for 
the  expensive  educational  work  which  fell 
upon  it  to  perform.  At  the  time  of  its 
organization  in  1884,  the  corporate  bond 
could  be  used  with  individuals  and  private 
corporations,  but  no  law  recognized  it, 


16 


and  the  necessity  for  legislation  came  sim¬ 
ultaneously  with  the  suggestion  of  applying 
the  corporate  idea  to  bonds  given  in  legal 
proceedings  and  for  public  officers,  and  along 
with  legislation  came  also  endless  work  in 
educating  the  courts  and  public  officials. 

The  surety  corporation  was  doubted. 
The  individual  with  real  estate  to  qualify — 
regardless  of  what  he  might  possess  when 
called  upon  to  pay  a  loss — was  preferred, 
so  deeply  rooted  was  the  old  system.  A 
court  official,  in  one  of  the  larger  cities, 
required  as  a  condition  precedent  to  ap¬ 
proval  that  companies  give  him  a  general 
indemnifying  bond,  signed  by  responsible 
individuals,  to  guarantee  the  company’s 
payment  of  any  claim  arising  under  bonds 
given  in  his  court !  I  think  am  correct 
in  saying  that  during  the  early  days  of  the 
business,  the  American  Surety  Company,  in 
order  to  satisfy  the  demands  made  in  the 
City  of  Chicago,  found  it  necessary  to 
purchase  a  valuable  piece  of  real  estate 
there,  that  some  tangible  evidence  of  its 
ability  to  meet  its  obligations  might  be 
actually  in  sight. 

We  are  certainly  indebted  to  the  Ameri¬ 
can  Surety  Company  for  removing  many  of 


17 


the  obstacles  which  hindered  the  early 
advance  of  the  business.  It  was  not  until 
August,  1894,  that  Congress  recognized  the 
superiority  of  the  corporate  bond,  and  passed 
the  bill  authorizing  the  acceptance  of  an 
approved  surety  company,  as  sole  surety 
in  the  Federal  Courts  and  in  the  various 
Departments  of  the  United  States  Govern¬ 
ment.  From  that  time,  the  business 
acquired  fresh  impetus.  The  growing 
preference  for  the  corporate  bond  had 
prompted  the  organization  of  additional 
companies;  still  others  have  entered  the 
field  since,  and  to-day  there  are  eleven  en¬ 
gaged  in  the  transaction  of  the  business  in 
the  various  States.  In  some  cities,  trust 
companies  are  taking  local  surety  risks, 
with  regard  to  which,  f  more  anon.  My 
remarks  now,  apply  to  companies  oper¬ 
ating  throughout  the  United  States.  Of 
the  eleven,  three  take  no  other  surety 
risks  than  those  embraced  in  the  fidelity 
class,  but  the  remaining  eight  do  a  general 
fidelity  and  surety  business. 

Court  Bonds. — The  Surety  Branch  is  a 
much  broader  subject  than  Fidelity  Insur¬ 
ance.  We  will  direct  our  attention  for  a 


18 


moment  to  bonds  required  in  legal  pro¬ 
ceedings.  They  may  be  classified  under 
three  distinctly  different  hazards.  One,  the 
monetary  obligation,  such  as  the  Under¬ 
taking  on  Appeal,  Supersedeas,  Discharge 
of  Attachment,  and  bonds  of  like  character, 
which  are  conditioned  for  the  payment  of 
a  definite  amount,  upon  judgment  of  the 
court.  No  such  bond  should  be  executed 
without  collateral  security,  of  a  character 
readily  convertible  into  cash,  being  depos¬ 
ited  with  the  company.  If  an  appellant 
have  not  the  means  to  pay  the  judgment 
already  found  in  the  lower  court,  he  will 
not  be  likely  to  have,  when  the  judgment 
shall  have  been  affirmed.  If  he  can  pay  at 
the  time,  he  should  practically  do  so,  by 
depositing  with  the  company,  as  collateral, 
such  securities  as  will  furnish  the  necessary 
funds  in  the  event  of  a  decision  against  him 
in  the  higher  court.  This  requirement 
should  invariably  be  enforced,  no  matter 
how  favorable  the  financial  condition  of 
the  applicant.  There  is  no  reason  why 
collateral  should  not,  and  every  reason 
why  it  should,  be  required,  even  admitting 
the  applicant’s  ability  to  pay  ultimately. 
To  illustrate :  Take  the  case  of  a  man 


19 


worth  $1,000,000  against  whom  a  judg¬ 
ment  has  been  entered  for  $50,000.  He 
desires  to  appeal  and  applies  for  a  bond. 
Suppose  it  be  made,  by  a  company,  with¬ 
out  collateral ;  that  the  judgment  be 
affirmed  and  the  company  so  notified  by 
the  creditor’s  attorney ;  that  the  debtor 
for  some  reason  does  not  respond ;  the 
company  must  immediately  give  its  check 
for  the  amount  and  charge  it  to  loss, 
suffering  for  a  time,  at  least,  a  correspond¬ 
ing  reduction  in  assets.  The  company  can 
then  resort  to  the  courts,  and  in  two,  three 
or  more  years,  may  recover  salvage  from 
the  debtor.  This,  however,  at  an  expense, 
in  attorneys’  fees  and  other  charges,  ten 
times  the  amount  of  the  premium  received 
for  the  bond.  The  risk  attached  to  such 
an  obligation  is  quite  the  same  as  that 
assumed  by  the  endorsement  of  a  note,  and 
no  man  or  corporation  should  expect  a 
surety  company  to  undertake  it  without 
ample  collateral. 

Under  the  second  class  we  place  the 
bonds  of  executors,  administrators,  guard¬ 
ians,  receivers,  trustees  and  others  occupying 
fiduciary  positions.  The  casual  observer 
would  say  that  bonds  of  this  character  are 


20 


purely  fidelity  risks  ;  but  not  so,  since 
fiduciaries  may  be  liable  for  loss  occasioned 
by  incompetency,  mistake,  error  of  judg¬ 
ment,  negligence,  or  the  failure  of  some  bank 
where  funds  are  deposited.  We  are  living 
in  a  wonderful  age.  Great  enterprises, 
requiring  many  millions  of  capital,  are 
promoted  with  the  ease  which  a  few  years 
ago  characterized  the  organization  of  com¬ 
paratively  insignificant  corporations,  and 
along  with  these  legitimate  investments, 
purely  speculative  tendencies  grow  and 
increase.  Fortunes  are  quickly  made  and 
as  quickljr  lost,  but  notice  is  taken  only  of 
the  successful  man.  The  unfortunate  who 
goes  down  and  loses  his  all,  drops  quickly 
out  of  sight.  To  the  temptations  incident 
to  a  prosperous  and  speculative  age,  are 
guardians,  trustees,  executors  and  the  like, 
exposed.  The  guardian,  with  no  thought 
of  dishonesty — on  the  contrary,  with  the 
very  best  of  motives,  thinking  to  make  a 
good  investment  for  his  ward,  and  inci¬ 
dentally  a  fortune  for  himself — may  ignore 
the  instructions  of  the  court,  and  invest  the 
funds  entrusted  to  him  in  some  business 
venture — perhaps  a  legitimate  enterprise — 
but  whether  it  be  so,  or  some  rank  specu- 


21 


lation,  the  result  is  the  same  if  the  venture 
prove  a  failure :  The  money  is  found  to 
have  been  lost  when  the  court  orders  an 
accounting.  I  can  conceive  of  no  position 
of  trust  which  carries  with  it  a  more  sacred 
responsibility  than  that  of  the  executor, 
administrator,  guardian  or  trustee.  The 
widow  and  orphan  should  be  made  perfectly 
sure  of  the  faithful  performance  of  the  trust, 
and  a  final,  full  and  satisfactory  accounting. 
This  the  bond  should  ensure,  and  in  order 
that  it  shall  do  so,  surety  companies,  in 
all  cases,  should  have  joint  control  of  all 
personal  property  belonging  to  such  estates; 
for  the  bond  of  a  company  which  disregards 
this  rule,  in  time  may  not  serve  such 
purpose.  Notes,  stocks,  bonds,  mortgages, 
etc.,  should  be  in  a  safe  deposit  vault,  there 
to  remain  except  when  removed  by  and 
with  the  consent  of  the  company,  and  cash 
should  be  deposited  in  bank,  subject  to 
countersignature  of  the  company.  Great 
care  should  be  taken  that  proper  orders 
are  given  by  the  court  regarding  the  in¬ 
vestment  and  handling  of  the  funds,  and 
that  such  orders  are  strictly  observed.  Of 
course  with  risks  of  this  kind,  the  character 
and  financial  responsibility  of  the  fiduciary 


22 


are  of  great  importance,  but  character  and 
honesty  alone  will  not  replace  money  in¬ 
advertently  lost.  Some  of  the  States  have 
enacted  laws  recently,  authorizing  such 
supervision  and  control.  I  doubt  if  sufficient 
protection  be  given  by  the  discretionary 
power  thus  vested  in  companies.  I  would 
advocate  that  legislation  go  a  step  further 
and  instead  of  merely  permitting,  make 
mandatory  the  joint  control  of  securities 
and  funds  under  ever}r  fiduciary’s  bond. 
Why  may  it  not  then  be  feasible  for  laws 
to  be  enacted,  not  only  authorizing  the 
acceptance  of  approved  surety  companies, 
but  requiring  that  all  bonds  f given  by 
fiduciaries,  in  fact  all  bojids  which  the  law 
can  control,  be  furnished  by  such  companies? 
It  is  only  a  step  from  preference  for  new 
and  superior  methods  to  the  abolishment 
of  antiquated  ideas.  In  many  of  the  States, 
individuals  are  prohibited^ from  personally 
undertaking  other  lines  of  insurance.  In  the 
absence  of  adequate  legislation,  judges  will 
do  well  to  inquire  as  carefully  into  the 
methods  to  be  pursued  by  the  surety,  as 
with  regard  to  its  financial  condition,  and 
decline  to  approve^any  bond  unless  every 
possible  safeguard  be  thrown  about  the 


23 


trust.  And  they  will  do  well  to  pursue  the 
matter  further  and  subsequently  satisfy 
themselves  that  the  requirements  are  being' 
fulfilled.  I  do  not  wish  to  be  understood 
as  saying  that  companies  fail  to  impose 
these  conditions  where  there  is  no  opposi¬ 
tion.  I  do  maintain  that  causes  for  waiv¬ 
ing  them  too  frequently  intervene,  and  that 
some  steps  should  be  taken  to  make 
impossible  any  exception  to  compliance 
with  the  safest  methods  which  can  be 
formulated. 

Under  the  third  class  of  bonds  required 
in  legal  proceedings,  may  be  placed  bonds 
and  undertakings  in  injunction,  for  costs, 
to  secure  attachment,  etc.  Usualty  the 
character  and  financial  responsibility  of  the 
applicant,  determine  the  surety  company’s 
action,  and  as  a  rule,  such  bonds  can  be 
safety  executed  without  collateral. 

Contractors*  Bonds* — Bonds  for  contract¬ 
ors,  as  a  class,  are  worthy  of  special  com¬ 
ment.  I  refer  particularly  to  bonds  given 
for  the  completion  of  public  and  private 
improvements.  The  practical  business 
ability,  as  well  as  the  financial  condition 
of  the  applicant,  together  with  the  terms 


24 


and  conditions  of  the  contract,  are  all  mat¬ 
ters  for  careful  consideration  in  passing 
upon  risks  of  this  kind.  No  contract  should 
be  drawn  so  as  not  to  excuse  the  contractor 
if,  by  reason  of  some  unforeseen  difficulty 
for  which  he  is  not  responsible,  it  become 
impossible  to  complete  the  work  as  out¬ 
lined  and  agreed  upon.  Yet  this  is  often 
done,  and  plans  and  specifications  frequent¬ 
ly  contain  other  conditions  manifestly 
unfair  to  the  contractor.  Competition  may 
force  him  to  submit  and  many  times  suffer 
a  loss,  which  the  surety  must  pay. 

Another  danger  to  be  avoided,  if  possible, 
lies  with  the  contractor  who  has  been  on  the 
shelf  for  years,  and  is  aroused  to  renewed 
activity  by  the  prospect  of  closing  a 
contract  at  a  low  figure,  and  inducing 
some  surety  company  to  pin  its  faith  to 
him  on  representations  of  past  ability  and 
expressions  of  friendly  references  who  are 
loath  to  advise  the  company  to  keep  off. 
If  he  secure  the  bond  applied  for,  he  will 
attain  his  object, — a  temporary  living  for 
himself  and  family — and  the  surety  company 
must  foot  the  bill.  A  prominent  United 
States  Government  official  has  remarked 
recently  that  since  the  advent  of  the  corpor- 


25 


ate  bond,  he  has  had  more  trouble  in  his 
Department  on  account  of  such  contractors, 
than  he  had  seen  during  his  whole  previous 
experience. 

Miscellaneous  Bonds. — There  are  other 
bonds  included  under  the  head  of  obliga- 
gations  guaranteeing  the  performance  of 
contracts,  growing  out  of  financial  under¬ 
takings,  limitless  in  scope,  many  of  which 
are  very  dangerous  propositions.  Since  the 
public  has  been  getting  acquainted  with  the 
corporate  bond,  certain  good  people  are  so 
anxious  for  a  surety  company’s  guarantee, 
that  if  they  are  interested  in  the  promotion 
of  any  doubtful  enterprise,  they  bestir 
themselves  to  tack  on  a  provision  for  a 
corporate  bond,  sugar-coated  with  the  most 
plausible  and  attractive  representations. 
Companies  have  ever  to  be  on  the  alert  if 
they  would  detect  the  dangers  underlying 
the  attractive  surface  of  much  seemingly 
favorable  business. 

And  there  are  many  other  bonds  of  which 
special  mention  might  be  made,  but  the 
time  allotted  to  a  paper  of  this  kind  will 
not  permit.  Bonds  of  public  officials  neces¬ 
sitate  familiarity  with  the  governing  laws 


26 


and  ordinances  ;  bonds  running  to  the  United 
States  Government  make  necessary  a  know¬ 
ledge  of  the  rules  and  regulations  of  the 
several  Departments.  To  sum  up :  The 
surety  company  to-day  must  keep  well  in¬ 
formed  with  regard  to  the  many  laws  pre¬ 
scribing  specific  duties  in  various  positions, 
and  must  be  equipped  to  intelligently  ana¬ 
lyze  and  consider  every  conceivable  business 
undertaking  and  determine  the  risk  involved 
and  the  necessity  for  indemnity. 


Existing  Conditions. 

And  now  as  to  existing  conditions  :  I 
feel  warranted  in  the  statement  that  not 
10  per  cent,  of  the  bonds  required  in  the 
United  States  during  the  last  twelve  months, 
has  been  made  by  surety  companies.  Rail¬ 
road  companies  uniformly — there  may  be  a 
rare  exception — have  abolished  the  use  of 
the  personal  bond.  Perhaps  50  per  cent, 
of  the  larger,  but  only  a  few  of  the  smaller 
banks,  use  corporate  bonds.  Compara¬ 
tively  few  of  the  bonds  required  in  legal 
proceedings,  are  yet  made  by  surety  com¬ 
panies.  I  have  previously  remarked  that 
it  is  possible  to-day  to  purchase  any  kind 


27 


of  bond.  I  mean  that  an  applicant  can 
secure,  at  a  reasonable  rate,  (less  than 
reasonable  to-dayr)  any  bond  to  which  he 
is  justly  entitled.  Then  why  are  individuals 
signing  most  of  the  bonds  ?  There  is  some 
remedy,  and  companies  ought  to  be  con¬ 
ferring  in  an  attempt  to  ascertain  and 
apply  it.  The  total  premium  income  of  the 
eleven  companies  for  the  year  1898,  was 
less  than  $3,500,000.  The  fact  is,  we  are 
devoting  our  time  rather  to  poaching  upon 
one  another’s  preserves  than  to  seeking  the 
many  uncultivated  fields.  I  desire  to  be 
understood  as  criticising  no  particular  com¬ 
pany  or  companies.  There  is,  I  regret  to 
say,  some  glass  in  my  own  house.  My 
thought  is  directed  towards  the  methods 
pursued  by  all,  and  which  cannot  be  remedied 
by  any  one  company  alone.  Active  compe¬ 
tition  is  but  the  natural  result  of  the  rapid 
growth  of  business  during  the  past  two  or 
three  years,  and  rate  cutting,  to  a  certain 
extent,  was  to  have  been  expected.  But 
rate  cutting  went  from  bad  to  worse,  and 
companies  have  been  for  some  time,  and  now 
are,  engaged  in  a  most  ill-advised  warfare. 
Companies  have  all  been  conspicuous  by 
their  silence  on  the  subject,  and  perhaps 


28 


this  may  be  a  fitting  occasion  for  public 
utterance.  Your  object,  in  inviting  here 
representatives  of  the  various  insurance 
interests,  would  not  be  attained  unless  we 
speak  plainly.  Let  us  not  deceive  ourselves. 
The  public  has  to  some  extent,  become 
aware  of  the  situation.  Insurance  critics 
have  commented  upon  it,  and  predict  the 
inevitable.  No  surety  company  has  been 
in  existence  long  enough  to  determine  what 
are  adequate  premium  rates  for  the  respec¬ 
tive  risks  assumed.  We  have  some  little 
information  regarding  the  loss  ratio  under 
fidelity  bonds,  but  in  other  lines,  nothing 
of  value  to  guide  us.  What  company  has 
had  sufficient  experience  with  bonds  required 
in  the  Probate  Courts  to  have  yet 
encountered  the  complications  and  losses 
growing  out  of  suits  brought  by  heirs  years 
after  the  settlement  of  estates  ?  Such  suits 
have  been  instituted  under  personal  bonds. 
Do  companies  hope  to  escape  them  ?  Rather 
let  us  look  to  have  those  suits  multiply. 
Instead  of  cutting  rates  so  low  as  to  be 
laughed  at  by  the  public,  we  ought  to  be 
conferring  in  an  effort  to  ascertain  what 
are  adequate  rates.  I  am  not,  however, 
more  disturbed  over  the  question  of  rates 


29 


than  over  many  other  things  of  equal  im¬ 
portance  to  our  welfare.  In  the  eagerness 
to  secure  patronage,  sound  business  princi¬ 
ples  are  being  subordinated,  and  risks 
undertaken,  not  only  at  ridiculously  low 
premium  rates,  but  without  regard  to  con¬ 
ditions.  Waiver  of  joint  control  of  estates 
is  frequently  offered  in  competition  as  an 
inducement  to  secure  the  bond  of  the  fidu¬ 
ciary.  Waiver  of  collateral  security  in  con¬ 
nection  with  undertakings  on  appeal,  etc., 
is  advanced  as  an  argument.  Frequently 
demand  is  made  that  applicants  not  posses¬ 
sing  requisite  collateral,  furnish  indemnity 
bonds  of  individuals  to  save  the  company 
harmless  from  any  loss.  It  is  manifestly 
inconsistent  that  a  counter  bond  of  this 
character  should  be  exacted,  except  that 
officers  and  stockholders  of  corporations 
should  be  willing  to  back  their  own  enter¬ 
prises.  Are  we  not  contradicting  ourselves 
when  we  argue  that  a  man  should  not  ask 
his  friends  to  sign  his  bond,  and  in  the  same 
breath  demand  that  he  give  us  an  indem¬ 
nity  bond  with  personal  surety  ? 

Companies  have  themselves  created  the 
only  real  difficulties  which  beset  them,  and 
being  of  their  own  creation,  the  conditions 


30 


can  be  readily  changed.  Many  reforms 
may  be  accomplished,  but  no  one  company 
alone  can  bring  them  about.  Underwriters’ 
associations  are  too  well  known  to  be  an 
essential  factor  in  the  successful  operation 
of  any  insurance  business  for  me  to  comment 
upon  their  advantages.  Yet  surety  com¬ 
panies  have  never  had  any  mutual  organiza¬ 
tion  whatever.  They  should  come  together 
in  friendly  association,  and  agree  never  to 
waive  joint  control  of  estates  ;  invariably 
to  require  collateral  security  under  mone¬ 
tary  obligations ;  never  to  demand  an 
indemnhying  bond  signed  by  individuals, 
except  as  I  have  already  stated;  to  establish 
a  S3rstem  of  interchange  of  information  re¬ 
garding  rejected  applications,  which  would 
prove  a  most  important  adjunct  to  the 
conduct  of  fidelity  business  with  safety  to 
companies  and  satisfaction  to  employers. 

If  such  a  compact  could  possibly  be 
construed  as  a  violation  of  the  anti-trust 
law  of  any  State,  then  such  law  should  be 
so  amended  as  not  only  to  permit,  but 
expressly  authorize,  surety  companies  to 
enter  into  such  agreements  and  adopt  safe 
methods  for  the  preservation  of  estates. 


31 


Local  Trust  Companies. — I  have  already 
referred  to  the  fact  that  in  a  few  places, 
trust  companies  are  doing  a  surety  business 
locally.  Time  will  demonstrate  that  this 
should  not  be  permitted  for  many  reasons. 
Their  operations  are  confined  to  so  small  a 
territory,  that  the  amount  of  business  done 
will  not  give  a  general  average.  They  take 
surety  risks  merely  as  an  incident,  with  a 
view  to  encouraging  patronage  in  their 
other  principal  departments.  The  limited 
premium  income  will  not  justify  the  employ¬ 
ment  of  trained  men  to  handle  the  surety 
business  properly.  They  cannot  afford  a 
force  of  inspectors.  The  loaning  of  money 
on  collateral  and  personal  security  will  ac¬ 
cumulate,  in  the  course  of  time,  assets  of  a 
questionable  character,  not  up  to  the  stand¬ 
ard  required  of  surety  companies  under  the 
insurance  law.  Not  only  that,  but  they 
are  liable  to  close  their  doors  and  go  into 
receivers’  hands  as  the  result  of  a  run  by 
depositors.  If  they  be  permitted  to  con¬ 
tinue,  ultimately  every  community  will  have 
its  little  local  company  dabbling  in  the 
surety  business,  and  most  disastrous  results 
will  follow.  My  first  experience  in  the 
business  was  as  manager  of  the  surety  de- 


32 


partment  of  a  trust  company,  and  I  speak 
knowingly  on  the  subject. 

Surety  companies  operating  all  over  tlie 
country  have  local  officers  in  the  large  cities, 
and  are  fully  equipped  to  take  care  of  all 
business,  so  that  remote  location  of  the 
Home  Office  and  consequent  delay  in  execu¬ 
tion  of  bonds  cannot  be  urged  as  an 
argument  in  favor  of  permitting  the  local 
trust  companies  to  transact  surety  business. 

Nor  should  the  fact  of  a  local  trust 
company  having  a  large  capital,  weigh  in 
its  favor  in  this  connection.  Losses  are 
paid  out  of  premiums,  not  out  of  capital; 
and  while  50  per  cent,  as  required  by  law, 
is  ample  reserve  to  provide  for  losses  which 
a  regular  surety  company  may  sustain,  hav¬ 
ing  the  benefit  of  the  general  average  of  a 
large  field,  the  entire  premium  income  of  a 
local  company  would  not  pay  one  excessive 
loss  possible  to  be  incurred  under  a  single 
bond. 

The  tendency  of  the  day  is  to  a  specialty ; 
not  only  in  the  professions,  but  in  business. 
The  banker  should  be  a  banker.  In  my 
opinion,  all  laws  now  authorizing  a  bank¬ 
ing,  trust,  and  surety  business  under  one 
charter,  should  be  amended.  Such  charters 


33 


are  usually  broad  enough  to  authorize  the 
company  to  buy  and  sell  exchange,  buy  and 
sell  real  estate  for  ‘itself  and  others,  act  as 
agent  for  collection  of  rents  and  placing  of 
•  insurance,  act  as  trustee,  executor,  admini¬ 
strator,  guardian,  etc.,  without  bond,  and 
as  well  perform  all  the  functions  of  a  com¬ 
pany  especially  organized  for  fidelity  and 
surety  business. 

Future  Prospects. 

In  conclusion  what  shall  I  say  with  re¬ 
gard  to  future  prospects  ?  The  corporate 
bond  is  a  recognized  necessity  and  it  will 
grow  in  favor  and  sooner  or  later  become 
the  universal  form  of  suretyship.  The  busi¬ 
ness  is  in  its  infancy ;  whether  it  shall 
rapidly  develop  or  continue  for  a  time  to 
shuffle  along  in  an  uncertain  manner  will 
depend  entirely  upon  the  companies  them¬ 
selves.  If  a  halt  be  not  called  in  the  present 
course  it  is  quite  possible  that  we  shall  see 
the  corporate  bond  discredited  by  conserva¬ 
tive  officials.  It  has  been  remarked  that 
the  failure  of  some  company  must  be  the 
solution  of  the  problem.  Such  will  prove 
true  if  nothing  else  serve  to  bring  com- 


34 


panies  to  a  proper  appreciation  of  their 
responsibilities  as  bondsmen,  but  I  want 
to  say  parenthetically  that  that  company 
will  not  be  the  National.  Why  not  guard 
against  such  a  catastrophe  ? 

If  companies  would  succeed,  fidelity 
rates  must  be  high  enough  to  provide  for 
ample  inspection  of  risks,  and  justify  the 
payment  of  losses  without  hope  of  salvaga 
(they  are  far  below  that  to-day.)  Other¬ 
wise  salvage  will  be  sought  at  the  expense 
of  waiving  prosecution,  and  once  let  this 
fact  become  known  to  employes,  crime 
will  increase  and  losses  be  heavier.  This, 
employers  should  well  consider  when  offered 
bonds  at  cut  rates.  Rates  for  fiduciaries’ 
bonds  must  be  high  enough  to  cover  the 
expense  of  joint  control ;  for  contractors’ 
and  miscellaneous  bonds  enough  to  justify 
the  company  in  assuming  the  risk  without 
indemnity  if  collateral  cannot  be  furnished, 
wholly  discountenancing  the  personal  in¬ 
demnity  bond.  I  say  if  companies  would 
succeed  they  must  cease  violating  the  im¬ 
portant  principles  of  surety  underwriting  ; 
put  a  stop  to  ill-advised  methods  ;  organize 
in  friendly  association,  and  through  inter¬ 
change  of  ideas,  comparisons  and  discus- 

v 


35 


sions,  and  the  resultant  adoption  of  uni¬ 
form  methods  for  the  protection  of  all, 
upbuild,  dignify  and  perfect  the  business, 
and  as  well  direct  their  united  strength  to 
accomplish  many  necessary  reforms  in 
existing  laws,  ordinances  and  governing 
regulations,  making  it  safe  to  undertake 
risks  which  are  now  dangerous,  and  gene¬ 
rally  devise  ways  and  means  of  cultivating 
and  occupying  the  great  fields  yet  untouched. 


36 


